There are a number of challenges that could impact your business if you operate in the tech sector. The following is a top list of critical legal issues that you should make top priority if you’re looking to scale your business in the right way:
Inevitably, as a technology company, you are likely to be collecting data about your customers, suppliers, partners etc. This can be great for marketing or other purposes but it does pose some genuine legal concerns that are worth thinking about. Securing and protecting data are high on the agenda for corporate risk and breaches can be headline makers. It could be extremely detrimental to your business if data is leaked or stolen and there’s a chance it could impact the integrity of your business as far as the goodwill of your customers is concerned. An expensive price to pay! One of the most important things to think about include hosting your data with a secure provider, with adequate firewall protections or reviewing any third-party systems you use to ensure they are compliant. If you don’t, the Information Commissioners’ Office could penalise you, imposing thousands of pounds in fines.
In addition, GDPR rules were published a few years ago and even now, companies are struggling to get to grips with what their obligations are. In short, GDPR rules exist to provide individuals with more control over how their personal data is collected, stored and used. If your business provides goods or services in the UK or EU, regardless of whether your business is located in the UK or EU or not, GDPR applies. For online businesses which often operate globally, this can be particularly challenging. Here are just some a few things to think about when thinking about how to remain GDPR compliant:
- Understand your data
Know what data you’re collecting, why you’re collecting it, whether you are keeping it or removing it, whether the data was consented to, whether the data includes any sensitive information etc. We’d recommend keeping a log of all of this from day one!
This one sounds pretty straightforward, but when you identify all the different types of data collected, stored and used and the source of each bit of data – it can get quite tricky!
- Appoint a Data Protection Officer (DPO)
If you’re collecting a large amount of data, then this is a legal requirement.
- Keep your data protection policies and procedures in constant review.
The last thing you want to do is to get bogged down with your head in spreadsheets or documents trying to keep on top of all your data sources etc, but it’s the right thing to do. The consequences can be severe if you are found in breach of your GDPR obligations.
Cap table and stock options
Our advice here is to not rely on a verbal agreement about ownership or shares with your employees. In the early days of a business, it’s very common to hear about informal agreements about share ownership in a company etc, but as the company grows – not having this in writing can turn out to be quite problematic. It’s important to ensure a record is kept of all the company’s securities such as stock, convertible notes, equity grants or warrants, who they are owned by and what was paid. This is usually in the form of a cap table.
It’s common to also want to grant stock options to employees or anyone else working in your business to incentivise them. Stock options are a really great way of rewarding your team for the growth in the value of your company and are considered an alternative to cash bonuses, for example. There are a number of various schemes available in the UK and your choice will depend on a number of factors, which all require specialist advice. Some of the agreements you might need will include;
- A stock option plan
This is the main plan that should be adopted by your business to issue stock options. It covers the key terms and conditions of the stock options and provides further detail about the stock options that you are planning to issue to your employees. There will be things that you’ll need to make sure are included here that may not be included in the stock option agreement
- A stock option agreement
This document is connected to the stock option plan. The detail contained within the document will be very specific i.e., who owns the shares, how many shares are being made available for the employee to purchase at what price. It will also include details of the vesting schedule i.e., you might want the employee to continue their employment with you for a specific period of time before all or parts of the options become available to them.
- An exercise agreement
Typically, this will normally be included with the stock option agreement and provides details about how to exercise the option. This will need to be very clear, so that your employees know how they can take advantage of purchasing stock in the future.
Expanding internationally/operating cross border
If you are thinking about expanding globally, you’ll be faced with a number of challenges. Some of those might be operational but other considerations will include tax, legal – including regulatory and compliance. You might find that you need to create a new/foreign legal entity and this will also require tax considerations and planning. You might also be looking for a physical location and hiring; all of the rules for doing so can differ depending on the jurisdiction you intend to operate in.
If you’re a technology company, you’ll want to think about protecting your IP, which includes any trademarks, design rights and patents. You might want to trademark your name or patent your technology. Whatever it is you’re thinking about doing, you’ll need to make sure you are registering your IP wherever you are operating. If you protect your logo in the UK but also operate in the US, you shouldn’t assume that your logo is protected there too. You can limit your filing to the UK, EU or global – so these are all options available to you. It’s not just a matter of protecting your IP though, as you might be limited in what you can do in other countries if the same or similar IP rights already exist out there.
If you are fundraising, you may also want to ensure that shareholders and employees waive intellectual property for the company. If not, it could put off potential investors if they realise that the IP doesn’t actually belong to your business.
The scope of this section merits an entirely separate blog in its own right, but we’ll cover off a few of the important things to think about very briefly here.
In the early stages of a fundraise, there can be a lot of negotiating involved. Negotiating with employees about IP or shareholders about the right kind of investment to opt for- there’s no shortage of things to discuss here. However, one of the most important things for you, as the business owners, will be setting the company valuation. Your investors will usually conduct their own valuation exercise, but you’ll want to ensure you are in agreement with that price. Usually, this involves seeking the help of professional business valuators, but you’ll also want to ensure that your interests are protected especially if this is the first set of a series of investments you wish to secure in the future. Lawyers can usually get involved in those early discussions with your investors, and that can be really handy to ensure you’re approaching things pragmatically and professionally.
You’ll also require support in reviewing all the investment paperwork thoroughly, explaining the meanings of clauses and how they could impact you. If you’re staying on in the business, this might alter the scope of your negotiations Vs if you’re exiting the business, so a legal expert guiding you through the process is an essential part of the transaction.
Our team at Tend Legal are well versed in the technology space, having worked with both ambitious entrepreneurs in tech start-ups right through to some of the most successful technology companies in the UK, operating globally. We’re always on hand to support our customers, identifying critical legal issues before they arise and helping you to make good, informed decisions about your legal options.
Tend Legal Limited, London